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The Journey to Good Governance and Risk Management

by Christelle Marais

01 May 2019

Would I lie if I said that small and medium enterprises (SMEs) in South Africa are reeling from the combined impact of state capture, corruption, red tape and an ever-changing regulatory framework that makes it increasingly difficult to survive?

How many SMEs spend inordinate amounts of time ‘just to comply’? Meanwhile, real business threats like digital disruption, the fourth industrial revolution, slow economic growth, competitors’ behaviour and clients’ changing needs can be addressed - to say nothing about growing businesses sustainably.

While this sounds very depressing, SME owners and leaders are actually in a powerful position. They are the lifeblood of our economy, and it's their contributions that will turn the tide – resting on our laurels will not get us to a better place!

SMEs usually grow from the energy, passion and resources of its founding members and they often become family partnerships, consortiums, syndicates or companies with external shareholders.

The risk for SMEs is that their governance capabilities may not grow and mature with their businesses, often destabilising them and slowing their growth because of their inability to leverage new opportunities.

It is critical to establish a robust foundation of good governance and risk management right from the start (when it is relatively easy and less costly) so that it remains embedded in the business culture as it grows.

Which is why the approach by the King Committee in the King IV Report on Corporate Governance for South Africa (King), i.e. to focus on specific ‘outcomes’ versus ‘inputs’ that consume resources, is so attractive. King does not require any specific compliance outcomes; it instead asks organisations to evaluate how what they have in place, contributes to achieving the following results:

• Ethical culture – Are we treating everyone we deal with or affect as we would like to be treated?
• Good performance – Are we delivering what we promised to? Are we achieving our targets?
• Effective control – Are we protecting ourselves, our customers, our suppliers and society from the negative aspects, impacts and outcomes of our existence?
• Legitimacy – Are we accepted by our society legal, responsible and transparent?

Thinking about these outcomes makes it much easier to govern businesses and manage risks more efficiently, as opposed to just ‘ticking boxes’ to comply.

So how is this even important to insurance intermediaries?

I believe there is a role for intermediaries to play in their capacity as ‘trusted partners’ to their clients, not only to manage insurable risks but to help clients manage their uninsurable and uninsured risks.

Even more important is the need to address clients’ exposures to governance, strategic and sustainability risks. Intermediaries who understand that their clients’ overall risk profiles make them more insurable, successful and sustainable versus intermediaries who only try to optimise clients’ insurance portfolios, have a better chance of retaining their appointments and actually contribute to the long-term success of their clients, and therefore the success of the economy in which those clients must operate.

RXNet recognises this opportunity and strives to provide intermediaries with the knowledge, skills and tools to play their roles more effectively and efficiently. Because King recognises that SMEs don’t have access to the resources for governance and risk management that large organisations have, it provides a specific sector supplement to guide SMEs on how to achieve the outcomes cost-effectively. Similarly, RXNet provides intermediaries with the means to assist their clients with these challenges in an innovative and cost-effective way.

In its sector supplement for small and medium enterprises, King IV specifically recognises SMEs as "the drivers of a growing and inclusive economy and of societal transformation" that should be "innovative and entrepreneurial, and open to technological change and productivity growth".

In this context, SMEs are an integral part of the renewal process that defines a market economy, contribute to job creation and enable broader society to enter the formal economy and mainstream society. In addition, King states that good "governance contributes to the success of an SME, as it enhances the functioning of its leadership structures and helps the [board] to govern in such a way that the SME meets its strategic objectives".

Further benefits of complying with King include the following:

• Added credibility and enhanced reputation
• Access to capital and loans on better terms
• The ability to attract talent for employment
• Improved access to customers and market participants
• Better positioning to capture business opportunities
• Better fraud prevention due to improved controls
• Business continuity arrangements that permit SMEs to be resilient, and to withstand and recover from shocks
• Leadership continuity through succession planning
• Better management of the risk of conflict in family businesses

RXNet, through its established network of expert partners, aims to enable its intermediary members to deliver services to their clients that will enable them to realise these benefits.

Company

RXNet (Pty) Ltd was established in response to the growing need for local delivery of professional services. Founded by experienced professionals from diverse backgrounds, the company relies on the combined expertise of a wide network of innovators to provide intermediaries with innovative solutions that help them better serve their clients and communities.